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Margin surprise served with some growth issues

Our view – Impact from surrender rule changes well contained

VNB margin – Impact from surrender rule changes contained at 30 bps, while product level margins improve: The implementation of surrender value rules has negatively impacted VNB margin by 30 bps for the quarter and 10 bps for 9MFY25. The earlier guidance of 100 bps impact was a gross impact if no mitigating steps were taken. The company has shared the impact with distributors through clawbacks, deferments and reduction of commission and the eventual impact is expected to be contained within 30 bps. For the quarter, calculated VNB margin increased 174 bps QoQ to 26.1%. However, on a like-for-like basis, VNB margin is up 60 bps on sequential basis. In 2QFY25, there was a one-time negative impact on VNB margin of 110 bps due to delay in repricing of products. The net sequential margin expansion was driven by improved product level margin across the board but especially for ULIP product. The VNB growth guidance remains at 15% plus, with management guiding for broadly stable margin in the last quarter.

APE growth – While APE has de-grown sequentially, management has guided for reasonable full year growth: APE growth for the quarter was -7.5% QoQ and 11.8% YoY. Management has stated that growth has been in broadly line with the private sector and is not a matter of any significant concern. Growth is broad-based from all channels and seasonality should help towards the end of the year. The company reiterated its overall APE growth guidance for the full year at 18-20%. The company’s counter share on the HDFC Bank has remained steady at 65% and the HDFC Bank channel is up 20% in 9M and 10% for the quarter due to high base.

We maintain an ‘ADD’ rating on HDFL with a revised price target of Rs 700: We value HDFL at 2.3x FY26 P/EV for an FY25E/26E/27E RoEV profile of 17.0%/17.2%/17.1%.

(See Comprehensive con call takeaways on page 2 for significant incremental colour.)

Other Highlights (See “Our View” above for elaboration and insight)

* VNB growth: The VNB de-growth/growth was -0.9%/8.6% QoQ/YoY, driven lower sequentially by de-growth in APE

* Expense control: Expense ratio de-grew/grew -53bps/96bps QoQ/YoY to 20.8%, QoQ driven lower by decrease of -238bps in Opex ratio

* Persistency: 37th month ratio fell -130bps QoQ at 71.8% and 61st month ratio fell -1010bps QoQ to 57.8%

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